NEW YORK (CNNfn) - Three former executives of a company that merged to form Cendant Corp. pleaded guilty in federal court Wednesday to accounting fraud in a scandal that led to a record $2.83 billion settlement with Cendant's shareholders.

All three defendants held top financial posts at CUC International of Stamford, Conn., which merged with HFS Inc. of Parsippany, N.J., in December 1997 to create Cendant. Cendant (CD: Research, Estimates), the franchiser of brand names such as Ramada hotels and Avis rental cars, is now based in New York.

Under oath in U.S. District Court in Newark, N.J., defendants Cosmo Corigliano, Casper Sabatino and Anne Pember said their actions were done at the behest of their superiors at CUC. They pledged to cooperate in a continuing investigation by the FBI and the Securities and Exchange Commission.

Federal officials began investigating alleged fraud at CUC in the 1980s. The scandal was disclosed in April 1998, sending Cendant shares plummeting. The company has acknowledged that CUC used irregular accounting practices to inflate earnings.

"It was a culture that had been developed over a period of years. It was ingrained ... ingrained in us by our superiors," Corigliano, CUC's former chief financial officer, said in court testimony, according to the Associated Press.

In a statement, Cendant said the scandal was a "sinister fraud" that was carried out for more than 12 years by the former CUC management. Wednesday's court action "validates what we have said all along; that this elaborate scheme, designed by senior management of the former CUC, hid the fraud from the public and from the former HFS" before the merger.

'Cooking the books'

In court, the defendants said CUC's quarterly earnings were inflated in the two years leading up to the 1997 merger through improper accounting methods, including underfunding a reserve on membership cancellations and drawing money from a merger account in efforts to inflate revenues.

"Don't we call that 'cooking the books'?" U.S. District Judge William H. Walls asked Sabatino, a former CUC accountant in charge of external reporting.

The third defendant, former CUC controller Anne Pember, said their actions led the company to overstate its operating income by $116 million in the two years before the merger, and Cendant to overstate its operating income by $170 million for 1997.

Corigliano, 40, of Old Saybrook, Conn., who became Cendant's executive vice president for international operations after the merger, pleaded guilty to conspiracy and wire fraud.

Pember, 40, of Madison, Conn., who became Cendant's senior vice president for accounting, pleaded guilty to conspiracy.

Sabatino, 47, of Sherman, Conn., who became Cendant's vice president for business development, pleaded guilty to aiding and abetting wire fraud.

All remain free on $100,000 bond pending sentencing Sept. 12. Each faces up to several years in prison.

SEC announces civil settlements

The three defendants, as well as Kevin Kearney, a former CUC director of financial reporting, also face civil charges brought by the SEC of violating federal securities law. In a statement Wednesday, the SEC said Sabatino and Kearney have agreed to settle the commission's charges, without admitting or denying the allegations. Corigliano and Pember are contesting the commission's actions, the SEC said.

Under the SEC settlement, Sabatino would be barred permanently from acting as an officer or director of a public company, the SEC said. Kearney will be required to pay fines of about $75,000 and be barred from practicing as an accountant for at least five years.

The SEC also said it had settled charges with three lower-level financial reporting and accounting managers at CUC.

"Today's actions make crystal clear that the SEC and the U.S. attorney have zero tolerance for fraudulent financial reporting," SEC enforcement director Richard H. Walker said.

In December 1999, the accounting firm Ernst & Young LLP agreed to pay Cendant shareholders $335 million to settle a lawsuit brought against it in connection with accounting irregularities. Ernst & Young was the accounting firm representing CUC at the time but has since severed ties.

Also last December, Cendant said it would pay its shareholders $2.83 billion to settle similar allegations. Shareholder attorneys say the settlement was the largest ever in a securities class action case. A federal judge has yet to approve the settlement.

When the scandal came to light more than two years ago, Cendant's stock price dove 46 percent in one day, to 19-1/16 from 35-5/8. The stock still has not recovered. Shares edged up 11/32 to 12-1/2 in Wednesday afternoon trading.